The Biggest Deal: Lobbying to Take
Social Security Private
By: Robert Dreyfuss
The American Prospect, May-June 1996
Not long ago, the Wall Street Journal called privatizing Social Security
"the biggest bonanza in the history of the mutual fund
industry." No wonder: By diverting 2 percent of payroll from Social
Security into private accounts, the government could shunt $60 billion a
year into the coffers of investment firms, banks, and insurance companies.
And some advocates of privatization, such as the libertarian Cato
Institute, want to replace Social Security entirely with individual,
IRA-like accounts that would end the government's role once and for all in
providing for the security of retirees.
Proposals for privatizing Social Security have circulated on the
right-wing margins of American politics for decades. Not even the Reagan
administration would embrace the idea. For years, tampering with Social
Security was considered politically untouchable. The 43 million people who
typically receive 30 to 40 percent of their income from the program—many
of them members of the American Association of Retired Persons
(AARP)—represent one of the most formidable forces in American politics.
Advocates of privatization could also never get past one basic problem:
How could Social Security taxes go into individual investment accounts
when the money was immediately being used to pay benefits to retirees?
Now two things have changed. A projected long-term deficit in Social
Security accounts is opening the door to more radical remedy. And a new
coalition in support of privatization is taking shape, backed by financial
interests that see an unprecedented opportunity in the diversion of Social
Security trust funds. These business and finance groups are now pouring
money into right wing think tank efforts, lobbying efforts, and publicity
aimed at putting privatization on the national agenda. When they are
finished, expect the privatization bandwagon to start rolling down your
It is not surprising to find the Cato Institute in the midst of the
swirl to privatize Social Security; there aren't many things government
does that Cato doesn't think private markets can do better. In 1995, for
Social Security's 60th anniversary, the Cato Institute began its
"Project on Social Security Privatization," with a goal of
raising $2 million to support a nationwide effort to raise public
awareness of a crisis in the system, focusing on the Hill, the media, and
public opinion. "We've already raised about half of what we expected
to raise," says Michael Tanner, director of health and welfare
studies at Cato. "We're receiving support from the financial
community, from the investment community, from the insurance community.
We're receiving support from large employers concerned about payroll tax
increases. And from foundations."
Cato's project is co-chaired by Jose Pinera, the former labor minister
of Chile who privatized that country's pension system, and William Shipman
of State Street Global Advisors, an investment company. State Street
itself is taking "a bold stance in favor of private investment
options for Social Security revenues," according to its director for
industry affairs, Lenny Glynn. To provide political advice, the bank has
hired John Sasso, a Democratic consultant who used to be Michael Dukakis's
top strategist. Cato's chief backers also include other banks, such as
Bank of America, Citicorp, and Chase, as well as insurers and securities
firms like Salomon Brothers.
Yet the Cato Institute is so insistent on radical change in Social
Security that some of the players, such as the Investment Company
Institute (ICI), the Securities Industry Association (SIA), and the
National Association of Manufacturers (NAM), appear to be reluctant to get
too close to it. Thus ICI has endorsed the more moderate legislation
introduced in the Senate by Democrat Robert Kerrey of Nebraska and
Republican Alan Simpson of Wyoming, which would channel 2 percent of
payroll into private investment accounts. Last year, testifying in support
of the Kerrey-Simpson plan, ICI's Matthew Fink warned that urgent action
was needed to deal with a "widespread sense of 'no confidence' in the
current Social Security system." Not only would workers get a better
return if their money were invested in the Personal Investment Plans (PIPs)
envisioned in the bill, but "the shifting of these funds from
Treasuries into stocks, bonds and mutual funds would provide much needed
capital for private industry," said Fink. ICI believes that anything
more than 2 percent would lead to insupportable transition costs, draining
too much money from the system and making it impossible to pay benefits to
Of course, many experts on Social Security see the situation much
differently. In testimony before a Senate subcommittee in March, Brookings
Institution economist Henry Aaron compared projected shortfalls in Social
Security to earlier ones that were dealt with by making moderate
adjustments in the system. In an interview, Aaron warned of the
substantial costs associated with privatization because of the fees that
would go to Wall Street brokerages and other purveyors of financial
instruments and the overhead associated with maintaining millions of
private accounts. These costs, Aaron argues, amount to a "head
tax," which would fall more heavily on low-income people. Of course,
if the securities industry didn't back privatization, Aaron says,
"they'd be nuts. One hundred ten million workers, that's a lot of
Putting Social Security in Play
While big business and Wall Street are quietly setting the wheels in
motion, a more subtle—and perhaps more significant—effort is also
underway to shape public discussion. That effort includes grassroots work,
media relations, and publicity stunts. In January, for example, the U.S.
Jaycees, an Oklahoma-based organization of under-40 entrepreneurs,
launched a nationwide bus tour to promote the need for Social Security
reform, including privatization. More public agitation is in the offing
because business proponents of Social Security privatization do not
believe that it can move forward until Americans are convinced that Social
Security is bankrupt and mismanaged by the government and that the private
sector ought to take the whole thing over.
The Biggest Deal
The most sophisticated seed money in this arena derives from the J.M.
Kaplan Fund in New York. About a year ago, the Kaplan Fund decided that
though a lot of people were starting to take a look at privatization of
Social Security in one form or another, "nobody knew each
other," says Chuck Hamilton of Kaplan. So they hired Carl Helstrom, a
consultant with Atlas Economic Research Foundation in Fairfax, Virginia, a
pro-market group, to conduct a study of "who's doing what,"
Hamilton says. The intention was to find worthy recipients of grant money
able to take the message of Social Security privatization to U.S. opinion
leaders, businessmen, the media, and academics. Eventually Kaplan made a
series of four grants.
One grant went to the National Center for Policy Analysis, a right-wing
think tank in Dallas, Texas, headed by John Goodman, a longtime advocate
of turning all government social welfare over to the private sector.
Goodman is one of the chief authors of the concept of "medical
savings accounts," which would replace conventional health insurance
and Medicare as "super-IRAs" would replace Social Security. The
Kaplan grant allowed Goodman's group to hold a series of briefings on
Capitol Hill for members of Congress and their staffs.
- A second grant went to the Institute for Research on the Economics
of Taxation, a right-wing think tank critical of federal taxation, for
a series of briefings on the Social Security crisis held for
executives in the financial services industry.
- A third grant went to Third Millennium, a group consisting of just
1,700 members that nonetheless purports to represent the unfortunately
named Generation X. [See Heather R. McLeod, "The Sale of a
Generation," TAP, Spring 1995.] In the debate over Social
Security, Third Millennium is best known for a poll conducted by Newt
Gingrich's favorite pollster, Frank Luntz—one of the architects of
the Contract with America—that reported that more young Americans
believe in flying saucers than in the future of Social Security. Third
Millennium Executive Director Richard Thau is busily placing op-eds,
making television appearances, speaking and testifying on Social
Security issues and, he says, "trying to create a climate where
young people could understand what the issue is about."
- And the fourth Kaplan Fund grant went to the National Development
Council, whose chairman, Sam Beard, a voluble former Robert F. Kennedy
aide, is seeking to create a grassroots drive to privatize Social
Security. His model is Mothers Against Drunk Driving. But although,
Beard says, "I'm taking money from everybody," he refuses to
solicit backing from the securities and Wall Street companies that
stand to benefit from the creation of tens of millions of IRA-like
accounts. "If the securities industry pushes for this," he
says, mixing metaphors, "they will be seen as money-hungry people
wringing their hands like vultures. Ironically, if the securities
people stay out of this, it would be much easier to sell it."
A survey that Beard has commissioned from Democratic pollster
Celinda Lake and Republican Fred Steeper shows that Social Security
privatization might win the support of Americans "who are angry
with government, don't trust it, are concerned about our economic
future, and are angry about taxes going up," according to Beard,
citing familiar right-wing themes.
Interestingly, Kaplan did not fund the Cato Institute work, and
Kaplan's Hamilton suggested that part of the reason is that Cato is
part of the "public policy ghetto" and that "if this is
identified as a Cato Institute idea, it's a dead issue." And he
added that Cato's project is already well funded. However, both Beard
and a representative of Third Millennium were members of the Cato
project's advisory committee.
Yet another member of the Cato project advisory committee seeking
to build grassroots support is Anne Canfield, a former General
Electric financial lobbyist and Hill staffer who set up the Retirement
Security Coalition in 1995. Working out of an office at McClure,
Gerard and Neuenschwander in Washington, D.C., a lobbying firm set up
by former Idaho Republican Senator James McClure and his aides,
Canfield's group proposes to "sell this through the power of
ideas," winning support from people under age 50. Though she is a
savvy Washington insider with strong links to the business and
financial groups working the issue on the Hill, Canfield hopes to
build a constituency for privatization of Social Security among
ordinary citizens, and she has already created a World Wide Web page
on the Internet and is planning an advertising campaign.
The Widening Circle
As the privatization campaign develops, many other groups are
tentatively exploring their potential role. The Retirement Savings
Network, a business coalition established to deal with pension issues,
will shortly begin discussing Social Security reform, cautiously at
first, says Steve Elkins, director of employee benefits policy at the
National Association of Manufacturers. The network also includes the
U.S. Chamber of Commerce, ICI, the Securities Industry Association,
the American Council of Life Insurance, the ERISA Industry Center, and
the Association of Private Pension and Welfare Plans.
In late 1994 NAM established a Social Security task force chaired
by Walter Maher, Washington representative for Chrysler, and including
Bill Modahl, tax counsel for Digital Equipment, who will also chair a
parallel task force just getting underway at the U.S. Chamber of
Commerce. Though NAM says that it is too early in the debate for the
group to support a particular proposal, it is concerned about the
impact of increased payroll taxes on large employers, according to
Elkins, who favors privatization. And although he says that NAM has
yet to begin lobbying the issue in Congress, Elkins says that he is
watching the issue closely on the Hill, predicting that the situation
in the Senate will change "very dramatically" this spring as
Senate leaders move to support one version or another of the
privatization proposals that are circulating.
In addition to the task forces at NAM and the U.S. Chamber, the
Fortune 500-based Business Roundtable is also getting its own task
force off the ground. And at the American Council of Life Insurance,
Ken Vest says that the industry group met recently "to set up the
means to study various ideas on privatization," noting that a lot
of insurance companies are in the business of managing annuities and
401 (k) plans, which could receive a steady flow of retirement money
if Social Security is privatized.
In Washington, the conventional wisdom seems to be that it is too
early for politicians to take the lead on Social Security
privatization. Newt Gingrich has suggested that the country is not yet
mature enough to discuss Social Security, but that the next Congress
will have to address the issue after the 1996 election. The leader of
privatization efforts in the House is Arizona Republican Jim Kolbe,
head of the Public Pension Reform Caucus. The caucus is comprised
largely of ideological freshman Republicans and a few Democrats, such
as Texas Representative Charles Stenholm, who co-chairs the group.
Kolbe notes that "very quietly, in the background" the GOP
leadership is supporting the effort. "The speaker has been very
helpful to us in our strategy," he says, but he adds that the
pressure of election-year politics will take Social Security off the
table for presidential discussion. "I would discourage the
presidential candidates from talking about it. There's no sense in
sending someone out to be slaughtered," he says.
Some groups supporting privatization are also worried about the
image they are projecting. ICI was rocked by a Wall Street Journal
article last February that noted that ICI and its member firms were
virtually salivating at the prospect of "a pot of money worth
trillions of dollars." That article "stopped everyone here
in their tracks," says an ICI source. "We all said, 'Oh my
God, we're too far out in front of it."' Another ICI official,
Kathy Rabon, says that the Institute will await the results of a study
it has commissioned before going any further.
Almost everyone involved in the issue says that it will be at least
1997 before anything serious happens on Capitol Hill, and probably
another several years before any changes are enacted into law.
"It's way too early," says a veteran Capitol Hill watcher of
Social Security who insisted on anonymity. "Somebody really
serious has to get behind it first." He adds that the biggest
problem in any proposal for privatization—and one acknowledged by
proponents—is that by funnelling money into private accounts, the
federal government would siphon off cash needed to cover the deficit
now. (Surpluses in the Social Security trust funds offset other
government expenditures.) "We're going to tell the government to
collect money and ship it off to Wells Fargo and Salomon Brothers?
Where are you going to get the $60 billion from?" he asks.
Clearly, taxes would have to be raised or spending cut even further
than proposed under current deficit-reduction plans. That's one of the
nasty little secrets that you won't see advertised in the coming
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